Voters reject Gandhi dynasty and its handouts

May 20, 2014 11:51 IST

It was the rejection of the Congress' welfarist economics by voters that led to the party's drubbing, says Andy Mukherjee.

In handing its worst-ever defeat to Sonia Gandhi’s Congress party, voters have not only rejected a dynastic cabal and its clumsy governance, but they have also junked its deeply cynical economic ideology. In the 10 years that they were in power, Gandhi and her party colleagues paid lip service to "inclusive growth". But in actual policies, the government created a money illusion by putting welfare ahead of work, freebies ahead of freedom, and consumption ahead of investment.

High inflation, slow gross domestic product growth, yawning budget deficits, rising inequality, and rampant corruption are the by-products of this model. While voters' anger is centred on these symptoms, it's really the underlying disease they want to cure.

That is why, rightly or wrongly, they have elected Narendra Modi. Not only is he seen as an able administrator, but his Bharatiya Janata Party promises to redraw the contract between individuals and the state -- or at the very least, rein in the excessive enlargement of the latter.

The years of strong GDP growth and the ballooning state have produced winners. Millions have emerged out of abject poverty. But most of them are stranded in a place that isn't really middle-class; only two out of 10 workers earn regular wages. The rest are more nervous about falling back than optimistic about moving forward.

Not everybody is gloomy at the same time, though. When farmers are cheerful, urban workers are feeling down. And if both have their heads above water, then the taxpayer must be drowning in debt.

This is how this whack-a-mole of misery works. Since productivity gains in agriculture have basically stalled, and cost of production keeps going up, it's the government's "support" prices for crops that drive farm incomes higher, benefiting about half of all workers. But rising food costs squeeze urban low-income earners who are already paying exorbitant prices for private education and healthcare because the State has abdicated its responsibility to provide these services with even a modicum of quality.

This isn't a uniquely Indian problem. Chinese State-owned enterprises used to support workers' consumption needs; they no longer do. And China, too, has cronyism, inequality and environmental degradation.

But there is a key distinction in the two countries' economic models. Beijing has consistently stressed investment and jobs ahead of consumption and welfare. India for the last 10 years has done the exact opposite.

The divergent approaches have produced starkly different outcomes: in a 2012 survey by the Pew Research Centre, 92 per cent of Chinese respondents said their standard of living was better than their parents' at the same age; only 67 per cent of Indians feel that way. Reliable estimates are hard to come by, but according to a government report about 40 per cent of the youth in the Indian state of Punjab "has fallen prey" to drug abuse.

The youth is disillusioned with a shrinking opportunity set. This is where the Congress party went wrong. It believed voters will forever mistake handouts for prosperity. For a decade, it allowed subsidies to grow by 19 per cent a year, faster than the 15 per cent increase in nominal GDP. The budget for a rural job guarantee, which produces few assets, has bloated to 3.5 times what the government spends on urban development. The Congress government has now given 800 million people a legal right to assured quantities of heavily subsidised food.

The ever-more-welfare model is unviable without some source of money. Before the 2008 financial crisis, strong inflows from abroad drove up annual capital formation growth to 18 per cent on average. But instead of using the tax revenue from that investment boom to create badly missing infrastructure so that high GDP growth could become sustainable, the government hastily expanded the welfare state.

The folly of too many freebies and too little infrastructure is evident: growth in capital formation has collapsed to five per cent. Voters may not know the statistics but they understand the imperative: there are 362 million Indians aged 10 to 24. They will need jobs, which require investment.

Mandarins in New Delhi blame the states. Gujarat, which Modi has run for 13 years, is an exception, they say. Most of the other 30 states -- especially in the country's north and east -- are neither themselves investing in human and physical infrastructure, nor doing enough to attract private investors and create jobs.

But this is a half-truth. State governments have become zombies partly because of the staggering losses of their power distribution utilities, which have undermined their fiscal position. But they got into the mess only because of the Congress's 1977 political ploy to give subsidised electricity to farmers in Andhra Pradesh. Other states latched on, and free power led to farmers pumping out groundwater at an alarmingly high rate. Sustaining this habit has meant long blackouts. A power shortage is the biggest reason why manufacturing is not taking off.

Some states, including Gujarat, have partially solved the problem by separating the cables that carry power to farms from those that supply the rest of the village. Farmers are gladly paying the full cost of electricity for domestic use because they are getting 24-hour supply. Irrigation is still subsidised, but utilities no longer lose money on their entire rural business.

Small improvements like this can make big differences to both people's lives and public finances. But the space for reforms has shrunk. An expanding federal government is choking the states, just as it is stifling private enterprise. What New Delhi spends on government-owned enterprises has expanded by 14 per cent a year over the past decade, while its financial contribution to state economic plans has grown just nine per cent. In inflation-adjusted terms, that's stagnation, especially since Indian states aren't allowed to tax non-farm incomes.

Voters have revolted against this over-centralisation. Deep down, they hope that one day their states, too, could become like Gujarat. It may not be Singapore, but has better governance than any of the large Indian states.

While the winner of this election was undoubtedly Modi, the loser is not merely the Congress party or the Gandhi dynasty. Instead, it is their contemptuous and contemptible economics that's going out the window.

Image: (from right) Outgoing Prime Minister Manmohan Singh, Congress President Sonia Gandhi and party Vice President Rahul Gandhi at the CWC meeting at party headquarters in New Delhi on Monday. Photograph: Atul Yadav/PTI Photo.

The writer is the Asia economics columnist at Reuters Breakingviews in Singapore.